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Elevator pitch

Debate over labor market flexibility focuses
mainly on firing costs, while largely ignoring wage determination and the
need for collective bargaining reform. Most countries affected by the euro
debt crisis have two-tier bargaining structures in which plant-level
bargaining supplements national or industrywide (multi-employer) agreements,
taking the pay agreement established at the multi-employer level as a floor.
Two-tier structures were intended to link pay more closely to productivity
and to allow wages to adjust downward during economic downturns, while
preventing excessive earning dispersion. However, these structures seem to
fail precisely on these grounds.

Key findings

Pros

In theory, two-tier wage bargaining
structures could reconcile macroeconomic stability with a closer
link between productivity and pay.

Two-tier bargaining structures may
be rationalized as an intermediate step toward greater
decentralization in wage setting.

In theory, the two-tier structure
should allow for a higher frequency in wage renegotiation in
response to shocks.

A two-tier structure can work if
plant-level bargaining, if any, prevails over the national
level, and wage floors are provided by statutory minimum
wages.

Cons

Evidence from a European Central
Bank firm-level survey suggests that two-tier regimes may result
in the worst of both fully centralized and fully decentralized
systems.

Two-tier systems do not seem to
support the expansion of performance-related pay.

Two-tier systems do not permit
adequate adjustment to temporary shocks by cutting wages and
hours of work rather than laying off workers.

Where there are large productivity
differentials, two-tier systems may reduce nominal wage
dispersion but increase real wage dispersion.

Author's main message

Two-tier bargaining structures that impose
minima set by national bargaining over plant-level negotiations tend to
combine the pay rigidity of centralized systems with the inattention to
macroeconomic constraints of decentralized systems. Unfolding two-tier
regimes into stand-alone plant-level bargaining and centralized agreements
for other firms could offer a better way to reconcile microeconomic
flexibility with macroeconomic stability. The multi-employer agreements
should impose wage rules rather than wage levels to be applied uniformly to
all firms, regardless of performance. And wage floors should be provided by
statutory minimum wages not by centralized bargaining.

Motivation

Two-tier bargaining structures such as those
prevailing in the countries affected by the eurozone crisis are claimed to
be responsible for the loss of competitiveness of these countries, as
documented by their real effective exchange rate appreciation relative to
Germany in the last 15 years (see Illustration). Based
on findings such as these, the European Commission, European Central Bank,
and International Monetary Fund (the so-called Troika) have been requesting
reforms to collective bargaining structures as a condition for providing
external assistance. Surprisingly enough, the same multilateral
organizations now pushing for reforms of bargaining systems had previously
praised the introduction of these two-tier structures as a way to reconcile
macroeconomic stability with some microeconomic flexibility in wage setting,
enabling a closer link between productivity and pay.

In these bargaining structures, multi-employer
wage agreements (at the national, industry, or regional levels) coexist with
plant- or firm-level, single-employer negotiations over a wide array of
issues, including pay levels. There is, however, a hierarchy in these
structures, brought about as a result of opposition by labor unions to a
fully decentralized system and resistance by employers’ associations,
dominated by large firms, to more competition in wage setting. The result is
a sort of “controlled decentralization,” in which the national wage
agreement dominates wage-setting at the local level. Wage floors are imposed
on lower level bargaining by the multi-employer agreements according to the
so-called “favorability principle,” which prevents plant-level agreements
from making workers worse off than they are under the higher level
bargaining (in peius).

What could explain such a sea change in
recommendations by lending institutions and multilateral organizations? Did
two-tier bargaining structures fail to do what they were expected to do? If
so, was it because they failed to deliver macroeconomic stability or the
microeconomic flexibility they were supposed to achieve?

While much work has been done in analyzing the
different effects on wages, employment, and earning differentials of
centralized and decentralized bargaining structures, much less is known
about the properties of the two-tier structures. Drawing on data from a
cross-country survey coordinated by the European Central Bank, it is
possible to fill in some of the gaps and shed light on the performance of
two-tier bargaining relative to either fully centralized or fully
decentralized systems, all the while acknowledging the heterogeneity of
bargaining regimes in different countries.

Discussion of pros and cons

The general structure of two-tier bargaining is
one in which the higher level of bargaining dominates, leaving to
plant-level bargaining only the ability to influence wages through “wage drift” with respect to wages
at the national or industry level. Sometimes this favorability principle
extends to issues beyond wages and encompasses other standards determined at
a higher level, such as hours of work and annual leave, and these terms too
can only be improved (from the employees’ perspective) but not worsened at
the lower level.

Beginning in the 1990s, a large number of
countries began to adopt two-tier bargaining structures or to extend the
scope of two-tier structures that were already in place. For instance, in
Denmark the proportion of firms carrying out two-tier bargaining more than
doubled between 1989 and 1995, with industry-level collective bargaining
agreements fixing the minimum wage and plant-level negotiations raising the
levels. Belgium experienced a similar expansion. While two-tier structures
were already in place in Belgium during the 1970s, they were quite limited
in scope. Then, from 1980 to the mid-1990s, the number of firms involved in
both industry- and plant-level agreements increased tenfold [2]. Two-tier bargaining structures
were also in place in Austria, Finland, Italy, the Netherlands, Norway, and
Sweden by the turn of the 21st century [3], [4]. More recently, Portugal and
Spain have joined this movement, although decentralization has never been as
organized there as in the countries where two-tier systems have a longer
tradition [5].

Although the history and design of these
structures differ considerably from country to country, a common impetus
behind their development was the search for an organized or controlled form
of decentralized collective bargaining. The so-called “social partners,”
rather than moving from fully centralized to fully decentralized structures,
opted for operating somewhere in the middle.

Three key forces played an important role in the
shift toward greater decentralization and the emergence of two-tier
structures. The first was globalization and import competition by goods from
low-labor-cost countries that eroded the rents that could be shared at the
bargaining table. Globalization also increased the employment bias of
centralized wage setting, since plant-level employment levels cannot be
negotiated under higher-level centralized bargaining. A second factor was
the unbundling of production along the value chain, with large firms
optimizing production on a plant by plant basis, which requires negotiating
all aspects of production simultaneously. The third factor, which applies
only to eurozone countries, was the introduction of the common currency,
which de facto decentralized even the most centralized wage structures by
depriving national agreements of any agent who could make credible
commitments to a targeted inflation rate [1].

Where do two-tier bargaining
structures exist?

Most studies on collective bargaining look
solely at aggregate figures of coverage at different bargaining levels, without considering
the nature of the participants in these bargaining structures. The
European Central Bank’s Wage Dynamics Network survey, an ad hoc survey
on wage and pricing policies at the firm level in the EU, collects some
information on bargaining structures at large and middle-size firms.
Only cross-section data for 2007–2009, covering 13 countries (Austria,
Czech Republic, Estonia, France, Greece, Hungary, Italy, Ireland,
Lithuania, the Netherlands, Portugal, Slovenia, and Spain) are currently
available to researchers.

The survey data suggest that at the outset
of the Great Recession two-tier bargaining was particularly relevant in
France, Greece, Italy, Spain, and Portugal, where, on average, about 90%
of employers reported that they were constrained in making downward wage
adjustment by higher-level, multi-employer collective wage agreements.
Between 6.7% and 44.2% of firms carry out plant-level bargaining on top
of multi-employer agreements [1]. In other words,
there was no stand-alone plant-level bargaining in these countries at
the time of the survey. This possibility was introduced recently in
Greece (2011), Portugal (2011), and Spain (2012) under conditions set by
the Troika, while France and Italy recently increased the scope for
exemptions from national collective bargaining agreements to allow
lower-level agreements that may worsen the position of workers (for
example, by lowering wages with respect to levels set under
multi-employer agreements).

What kinds of firms carry out plant-level
bargaining on top of multi-employer agreements in these countries? As
suggested by Figure 1, these firms are larger than the
typical business unit, probably because small firms are either not
unionized or the unions are not strong enough to impose a second level
of bargaining that improves on the national or industry-level wage
agreements. This size effect may also explain why plant-level bargaining
agreements are concentrated in energy and manufacturing (Figure 2). Employers obviously have no
incentive to sit at a decentralized bargaining table when the outcome
can only add to the wage scale already imposed by higher levels of
bargaining. True, in some cases a claim can be made that a reduction in
pay compared with the national or industry-level agreement can support
the interests of the workers involved (satisfying the favorability
principle), but it is always a risky proposition for employers of firms
that are not close to bankruptcy to challenge contractual minima imposed
by higher bargaining levels.

Behavior during the Great
Recession

In the Wage Dynamics Network survey, which
in most countries was carried out at the beginning of the Great
Recession of 2008–2009, firms were asked how they would reduce labor
costs, whether by cutting hours, wages (either the base wage or
bonuses), or employment (either temporary contracts or permanent
contracts). The responses indicate that firms carrying out plant-level
bargaining within two-tier bargaining systems do not behave much
differently from firms whose employers confine themselves to applying
national or industry agreements without further bargaining at the
decentralized level.

The firms applying plant-level agreements on
top of multi-employer agreements adjust employment more than wages or
hours in response to adverse shocks, unlike firms that have no
collective bargaining at all. In particular, about 60% of firms involved
in two-tier bargaining adjust mainly employment, just like firms
involved only in multi-employer bargaining. By contrast, firms where
bargaining presumably takes place only at the individual firm level
adjust mainly wages in response to adverse shocks (Figure 3) [1]. These findings, which are
robust to controls for country, industry, and size of firms, suggest
that plant-level bargaining in two-tier regimes is inefficient in that it does not allow wage concessions to be
traded for employment security, as in the case of stand-alone
plant-level bargaining.

The issue is that in plant-level
negotiations in two-tier bargaining, wages can be adjusted only above
the wage floor imposed by the multi-employer bargaining agreements. This
constraint prevents lower level negotiations from agreeing to wages that
are below the level established at the national, industry, or regional
level. This constraint clearly reduces the scope for plant-level
bargaining by shrinking the relevant range of bargaining outcomes in
which wage concessions can be traded for employment concessions at the
plant level. If the wage floor is sufficiently high, plant-level
bargaining can improve the situation of only one party to the
negotiations, the unions, while making the employer worse off. If the
plant-level union is sufficiently strong, it may force the employer to
increase employment without cutting wages, causing profits to decline.
Otherwise, plant-level negotiations will not depart from the outcomes of
higher (multi-employer) bargaining levels.

Put differently, there are no efficiency
gains in moving from a centralized to a two-tier bargaining regime, as
the lower bargaining level cannot truly bargain over wages and thus
cannot achieve the types of outcomes posited in the literature for
decentralized outcomes [6], [7], [8], which feature lower wages
and higher employment than the so-called right-to-manage outcomes of multi-employer bargaining over
wages only. Similarly, wage floors imposed by multi-employer bargaining
prevent decentralized bargaining from achieving outcomes that could help
reduce gross job destruction during times of temporary negative shocks
by allowing for cost reductions along the intensive margin through
adjustment of hours. That is because the wage floors prevent tradeoffs
between reductions in hours and monthly wages and employment concessions
[9].

Incidence of performance-related
pay

A key argument made for the introduction of
two-tier bargaining structures was that they would allow pay and
productivity to be linked more closely than is the case under pure
multi-employer bargaining. The European Central Bank’s Wage Dynamics
Network survey data suggest that more firms that are subject to both
levels of bargaining use performance-related pay practices than do firms
subject only to multi-employer bargaining (Figure 4). However, the part of the wage
bill that is affected by remuneration components that are linked to an
individual’s performance is no greater in firms that are engaged in both
levels of bargaining than it is in firms that apply only higher-level
agreements. Moreover, both the extensive component of
productivity-related pay (fraction of firms using performance-related
pay) and the intensive component (fraction of the wage affected by
performance-related pay) are higher in firms applying stand-alone
agreements.

These findings are quite striking, as
two-tier regimes were, at least in principle, introduced to link
productivity and pay more closely. The relatively low share of
performance-related pay in overall pay in the firms engaged in two-tier
bargaining may have to do with the presence of wage floors imposed by
multi-employer bargaining in the two-tier structures, so that wages can
be increased only over an already relatively high wage floor.

Performance-related pay cannot operate
properly as an incentive device under these conditions, because
employers will try to contain the potential wage drift associated with
the second level of bargaining. Also working against a closer link
between productivity and pay in firms under two-tier bargaining regimes
is the fact that plant-level agreements in two-tier structures typically
occur less frequently than industry-level agreements [10]. This prevents linking
productivity and pay more closely by adjusting remuneration to changes
in the business environment faced by firms.

Wage differentials and two-tier
regimes

A final argument that is usually made in
favor of two-tier bargaining structures over fully decentralized wage
structures is that the two-tier structures prevent the rapid spread of
wage inequalities. According to Richard Freeman, in particular, “if you
want to increase inequality, you must weaken centralized collective
bargaining” [11]. However, the compression of
nominal wage disparities does not necessarily imply a reduction in real
wage inequality, notably in countries with large productivity
differentials across firms and regions. Where wage structures are
compressed, such productivity differentials generate large differences
in unemployment and housing costs across regions. The wage structure is
then distorted as workers move from low-productivity and
high-unemployment areas to high-productivity and low-unemployment areas,
boosting residential costs in the new area and thus reducing real wages.
When workers’ living standards are properly measured, it turns out that
real wage dispersion may be even larger in countries with centralized
wage structures than in countries without them [12]. Even more important, such
inequalities in real wages are associated with large efficiency losses,
as they lead to increased unemployment and reduced output by rewarding
low-productivity workers and preventing more and better quality jobs
from being created in high-productivity firms.

Limitations and gaps

Firms are not randomly allocated across
different bargaining regimes. Hence, the associations that are observed
between bargaining regimes and firms’ adjustment to shocks and the extent of
performance-related pay can be interpreted only as correlations. However,
the findings are robust to controls for the factors that are likely to play
a key role in the sorting of firms across bargaining regimes (country,
industry, and size). To identify a causal effect of the bargaining structure
on a firm’s adjustment to shocks and the extent of performance-related pay
would ideally require combining cross-sectional data and time series
observations on firms and identifying the effects of two-tier bargaining by
exploiting some exogenous variation in the bargaining regime.

Summary and policy advice

Overall, the case for two-tier bargaining is not
very strong, but the reasons are only partly related to external
competitiveness. The real issue is that these structures do not allow for
the microeconomic flexibility in wage setting, employment, and hours
adjustment that they were supposed to achieve, and they do not seem to
enhance productivity-related pay.

A better design for collective bargaining might
be a structure in which plant-level bargaining, wherever it occurs, prevails
over higher bargaining levels and where industry-level or national
bargaining holds only on a subsidiary basis—that is, where it is limited to
firms that do not engage in collective bargaining at the plant level.
Excessive wage inequality associated with monopsonistic power of employers
can be reduced, in this context, by statutory minimum wages that are set at
a level that does not have strong negative effects on employment.

Compressing nominal wage structures through
national agreements may instead distort incentives, increase unemployment,
and paradoxically increase the dispersion of living standards among workers.
It is better that national agreements specify wage rules, rather than wage
levels, allowing wages to differ according to performance in each individual
firm.

Acknowledgments

The author thanks an anonymous referee and the
IZA World of Labor editors for many helpful suggestions on an earlier draft.
This paper draws on many of the findings in [1].

The coverage of collective
bargaining

The coverage of
collective bargaining refers to the percentage of the eligible
workforce—employees with bargaining rights—whose contract is regulated by
the relevant collective agreement. It often exceeds the union density rate, that is, the fraction of workers who are
members of trade unions. In this case, reference is made to the excess coverage of collective bargaining.